Chapter 11 Supplement - SCM Analytics

Operations Management: Sustainability
and Supply Chain Management

Twelfth Edition
Supplement 11
Supply Chain Management
Analytics
Copyright © 2017, 2014, 2011 Pearson Education, Inc. All Rights Reserved
Outline
• Techniques for Evaluating Supply Chains
• Evaluating Disaster Risk in the Supply Chain
• Managing the Bullwhip Effect
• Supplier Selection Analysis
• Transportation Mode Analysis
• Warehouse Storage
Learning Objectives (1 of 2)
S11.1 Use a decision tree to determine the best number of
suppliers to manage disaster risk
S11.2 Explain and measure the bullwhip effect
S11.3 Describe the factor-weighting approach to supplier
evaluation
Learning Objectives (2 of 2)
S11.4 Evaluate cost-of-shipping alternatives
S11.5 Allocate items to storage locations in a warehouse
Evaluating Disaster Risk
• Many forms of potential disruptions
• For a given supply cycle, the probability of n suppliers being disrupted is
P (n )  S  (1 – S )U n
S = the probability of a “super-event” that would disrupt all suppliers
simultaneously
U = the probability of a “unique-event” that would disrupt only one

supplier
L = the financial loss incurred in a supply cycle if all suppliers were

disrupted
C = the marginal cost of managing a supplier

How Many Suppliers? (1 of 2)
• Portfolio of suppliers to balance costs and risks
• Evaluate one, two, or three suppliers using a decision tree
S  0.5%, U  4%, C  $10,000, L  $10,000,000

P 1  0.005  1 – 0.005  0.04  0.005  0.0398
 0.044800, or 4.4800%
P  2   0.005  1 – 0.005  0.04 2  0.005  0.001592
 0.006592, or 0.6592%
P 3   0.005  1 – 0.005  0.043  0.005  0.000064
 0.005064, or 0.5064%
How Many Suppliers? (2 of 2)
Figure S11.1 Decision Tree for Selection of Suppliers Under Risk
The Bullwhip Effect
• The tendency for larger order size fluctuations as orders are
relayed through the supply chain
• Creates unstable production schedules, expensive capacity
change costs, longer lead times, obsolescence
• Damage can be minimized with supplier coordination and
planning
Figure S11.2 The Bullwhip Effect
Managing the Bullwhip Effect
Table S11.1 The Bullwhip Effect
Cause Remedy
Demand forecast errors (cumulative Share demand information
uncertainty in the supply chain) throughout the supply chain
Order batching (large, infrequent Channel coordination: Determine lot
orders leading suppliers to order sizes as though the full supply chain
even larger amounts) was one company
Price fluctuations (buying in advance Price stabilization (everyday low
of demand to take advantage of low prices)
prices, discounts, or sales)
Shortage gaming (hoarding supplies Allocate orders based on past
for fear of a supply shortage) demand
RFID Helps Control Bullwhip
The Bullwhip Effect Measure
Variance of orders σ 2orders

Bullwip   2
Variance of demand σ deamnd
If measure is:
 1  Variance amplification is present

 1  No amplification is present
 1  Smoothing or dampening is occurring
Calculating the Bullwhip Effect
• Transform sheet steel to tabletops
• Each firm in the supply chain has one supplier and one
customer
Supplier Selection Analysis
• Many factors play a role
• Choosing lowest bid is becoming rare
• Factor-weighting technique considers multiple criteria
– Each factor is assigned a weight and a score
– Choose the supplier with the best weighted score
Factor Weighting Approach
Transportation Mode Analysis (1 of 2)
• Evaluate holding verses shipping options
– Ship connectors from San Jose to Singapore
– Value of connectors = $1,750
– Holding cost = 40% per year
– One carrier is 1 day faster but $20 more expensive
Daily cost of holding   Annual holding cost  product value   365

the product
 .40  $1,750  / 365
 $1.92
Transportation Mode Analysis
• Evaluate holding verses shipping options
– Ship connectors from San Jose to Singapore
– Value of connectors = $1,750
– Holding cost = 40% per year
– One carrier is 1 day faster but $20 more expensive
Daily cost of holding   Annual holding cost  product value 

the product
 .40  $1,750  / 365
 $1.92
$1.92 < $20.00 Choose slower shipping
Warehouse Storage (1 of 3)
• Storage is a significant step for many items
• Determine which items to store in various locations
– Proper placement improves efficiency and saves time
Blocks Of Storage
Item Monthly Trips To Storage Space Needed
Lumber 600 5
Paint 260 2
Tools 150 3
Small hardware 400 2
Chemical bags 90 3
Lightbulbs 220 1
Item Trips/Blocks Ranking Assigned Blocks

Lumber 600 5  120 4 6, 7, 8, 9, 10
Paint 260 2  130 3 3, 5
Tools 150 3  50 5 11, 12, 13
Small hardware 400 2  200 2 2, 4
Chemical bags 90 3  30 6 14, 15, 16
Lightbulbs 220 1  220 1 1
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Chapter 11 Supplement - SCM Analytics

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Operations Management: Sustainability

and Supply Chain Management

U = the probability of a “unique-event” that would disrupt only one

L = the financial loss incurred in a supply cycle if all suppliers were

C = the marginal cost of managing a supplier

S  0.5%, U  4%, C  $10,000, L  $10,000,000

Variance of orders σ 2orders

 1  Variance amplification is present

Daily cost of holding   Annual holding cost  product value   365

Daily cost of holding   Annual holding cost  product value 

$1.92 < $20.00 Choose slower shipping

Item Trips/Blocks Ranking Assigned Blocks

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